Years ago, I found myself sitting in law school in Moot Court wearing an oversized itchy blue suit. It was a horrible experience. In a desperate attempt to avoid anything like that in the future I enrolled in a tax course. I loved it. I signed up for another. Before I knew it, in addition to my JD, I had a LL.M Taxation. I needed only to don my cape…. taxgirl® was born. Today, I live and work in Philadelphia, PA, one of the best cities in the world (I can't even complain about the sports teams these days). I landed in the City of Brotherly Love by way of Temple University School of Law. While at law school, I interned at the estates attorney division of the IRS. At IRS, I participated in the review and audit of federal estate tax returns. I even took the lead on a successful audit. At audit, opposing counsel read my report, looked at his file and said, “Gentlemen, she’s exactly right.” I nearly fainted. It was a short jump from there to practicing, teaching, writing and breathing tax.

Property Damage and Casualty Losses After Irene

This morning, the sun is shining prettily outside the window. There is hardly any indication of the storm that was Hurricane Irene that roared through the area – except that I am typing this article on a laptop in a darkened room, not sure when or where I’ll post it. We are one of hundreds of thousands of people still without electricity as a result of Irene’s wake. In our case, several downed trees turned out to be our undoing: at least one took out the power line and another fell across the street, blocking traffic, so that no one, including utility trucks, could make it in or out. Although it had the makings of a horror film (it seems fitting that I’m not terribly far from Stephen King’s house), we avoided men with hockey masks and chainsaws and made it through the night.

Fortunately for us, we have loads of inconvenience but no actual harm. With the exception of smacking my leg when I tripped over the dog (note to self: black dogs are impossible to see in the dark), my family is safe as is my car and our house.

Not everyone made it out of Irene’s path so easily. Friends have emailed photos of the flooding along the Delaware and Schuylkill Rivers in Philadelphia and entire streets still remain under water.

Hopefully, most property owners who sustained damage were covered by insurance, though insurance doesn’t always cover the entire scope of the loss, especially when there is flooding involved. To the extent that you suffer losses that are not covered by insurance, you may be able to claim a casualty loss related to Hurricane Irene as a deduction on your federal income tax return.

The first step in claiming a property loss is to determine whether it meets the criteria for the deduction. According to the IRS, a casualty loss is the result of “the damage, destruction or loss of your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake or even volcanic eruption.” So the hurricane hits, the hurricane causes damage, you most likely have a casualty loss.

To determine the amount of the loss, figure the Fair Market Value (FMV) of your property before and immediately after the casualty. You must also include any adjustments to your property’s basis in your calculation and you can’t claim a loss greater than the worth of the property. Keep in mind that you may not deduct casualty and theft losses covered or reimbursed by insurance.

You usually claim a casualty loss in the year the disaster occurs – in this case, for the tax year 2011. However, if the loss occurred in a federally declared disaster area (check the FEMA web site to see which areas are covered), you may choose to treat the loss as having occurred in the year immediately preceding the tax year in which the disaster happened – in other words, for the tax year 2010. To claim a loss on last year’s return, you must simply file an amended return (federal form 1040X).

If your loss deduction is more than your income, you may have a net operating loss. Unlike many other deductions, you do not have to be in a trade or business to have a net operating loss from a casualty.

It’s best to consult with a tax professional if you have questions about whether you qualify or how to calculate your loss. Assuming that you qualify for the deduction, to claim casualty and theft losses, you must itemize your deductions on a Schedule A – unfortunately, if you file using the standard deduction, you may not claim a casualty loss. However, keep in mind that depending on the scale of your loss, this may bump you into the category of taxpayers who itemize. Generally, to itemize, the amount of your deductions must exceed the standard deduction. For 2011, the standard deduction amounts are:

$11,600 for married couples filing a joint return, up $200;

$5,800 for singles and married individuals filing separately; and

$8,500 for heads of household.

(An additional standard deduction for blind people and senior citizens is $1,150 for married individuals and $1,450 for singles and heads of household.)

Of course, tax deductions are the least of your worries when you’re standing in a muddy basement or surveying a damaged car. My thoughts are with all of you who were affected by the storm. Hopefully, damage and loss in your area are minimal. Please do let me know how you are – either by sending an email or posting in the comments below.

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